This medical marijuana stock has soared since early 2016 and, now with a $2 billion market cap and a share price above $13, is no longer a penny stock. Still, there are challenges ahead for Canadian producers—even as many expand their output to meet greater demand. That demand is expected to spike when Canada legalizes marijuana by July 2018.
APHRIA INC. (symbol APH on the Toronto Exchange; www.aphria.com) is a licensed producer of medical marijuana based in Leamington, Ontario. Not only does it sell to retail patients, it also sells to other Canadian licensed producers.
Aphria currently operates 100,000 square feet of medical marijuana greenhouses. It’s now working toward adding an additional 200,000 square foot greenhouse and then a further 700,000 square foot facility.
When completed, the 1,000,000 square feet will give the company yearly capacity of 100,000 kilograms of dried cannabis. [ofie_ad]
In addition to these two expansion projects, Aphria owns 100 acres in the Leamington area that can be built out to add even more capacity.
The company’s management team is led by CEO Vic Neufeld. He was chief executive of vitamin maker Jamieson Laboratories for 21 years until the business was sold for $300 million in 2014. In October, 2016 Aphria also announced that former Dragons Den panellist and entrepreneur Arlene Dickenson would join its board of directors. She is also expected to support the company’s marketing efforts.
In the first quarter ended August 31, 2017, Aphria’s revenue rose 7.0%, to $6.1 million from $5.7 million a year earlier. The company earned $15.0 million, or $0.11 a share, in the quarter. It made $895,269 or $0.01 a share, a year earlier.
Penny Stocks: Holds cash of $118.7 million
Aphria has $118.7 million in cash, so it has the funds to continue its expansion plans.
This includes a recent five-year agreement to become the preferred supplier of medical cannabis to pharmacy chain Shoppers Drug Mart (which is owned by Loblaw Cos.). Aphria will supply Shoppers with four strains of dried marijuana in two different sizes and four cannabis-infused oils. All 12 products will carry the Aphria brand name. The deal is contingent on Health Canada approving Loblaw’s application to dispense medical marijuana through its more than 1,300 Shoppers Drug Mart stores.
If approved, Shoppers Drug Mart is expected to sell the Aphria-branded cannabis products online with delivery by mail. Current federal regulations currently restrict the sale of medical marijuana in retail pharmacies.
Aphria sells into a limited and highly regulated market. As well, there are very low barriers to entry for new medical marijuana producers. If the market grows large and profitable enough, big producers, including tobacco companies, will likely enter the market and take sales away from small growers such as Aphria.
Longer term, the federal government’s plans to expand the legalization of marijuana in Canada could represent a considerable threat to licensed producers. They depend on a heavily regulated market.
Aphria’s share price has soared since mid-2016--with an especially big gain since October 2017--along with many other Canadian marijuana stocks. Their speculative appeal has attracted investors looking for a “ground-floor opportunity.” However, the pioneers in an industry are not always the ones who survive.
Aphria may move higher as momentum investors buy shares of widely followed marijuana stocks. However, the company has a high “market cap” (the value of all shares outstanding), in relation to its current sales. That means it needs substantial revenue growth to justify its current stock price, let alone move higher. If revenues merely hold steady, its stock price will be vulnerable.
TSI Network recommendation: We don’t recommend the shares of Aphria Inc.
For our advice on investing with less risk and a greater chance of success, read 2 big risks of Canadian penny stocks you can avoid.
For our recent report on a Canadian penny stock in the mining industry, read Amerigo Resources ready for rise in copper.
